The House Financial Services subcommittee on Financial Institutions and Consumer Credit held a hearing on Wednesday entitled "The Impact of Dodd-Frank's Home Mortgage Reforms:  Consumer and Market Perspectives."  Scheduled to speak at the hearing were representatives of the National Association of Home Builders (NAHB), the Manufactured Housing Institute (MHI), National Association of Mortgage Brokers, National Consumer Law Center, the Securities Industry and Financial Markets Association (SIFMA), Center for Responsible Lending, the National Association of Realtors® (NAR), and the Mortgage Bankers Association (MBA). 

NAHB First vice Chairman Rick Judson told the committee members that proposed lending reforms under the Dodd-Frank Act must be structured so as to cause minimum disruption to the mortgage markets while ensuring consumer protections. 

 "NAHB urges the Consumer Financial Protection Bureau (CFPB) and policymakers to consider the long-term ramifications of these rules on the market, and not to place unnecessary restrictions on the housing market based solely on today's economic conditions. Overly restrictive rules will prevent willing, creditworthy borrowers from entering the housing market," Judson said.

Even with QM broadly defined, the flow of credit could be restrained if lenders face a high risk of legal challenges to their loan decisions.  Therefore Judson said NAHB supports a QM safe harbor definition that would provide more assurance to lenders that they will not be subject to increased litigation if they use sound underwriting criteria. The safe harbor should incorporate specific ability-to-repay standards.

NAR's Vice President and Liaison to Government Affairs Scott Louser also urged Congress and the Administration to develop a broadly-defined QM regulation.  "Creating a broad QM that establishes strong consumer protections, promotes mortgage liquidity, incorporates important ability-to-repay standards, and offers lenders a safe harbor that reduces litigation exposure benefits lenders, investors and consumers will help ensure the revival of the home lending market."

Louser testified that another area of concern is a provision in the QM which limits the total points and fees collected by lenders and their affiliates to 3 percent of the loan amount.  This discriminates against real estate and mortgage firms with affiliates involved in the transaction and limits companies from offering full services to clients. NAR urges Congress to pass H.R. 4323, the "Consumer Mortgage Choice Act", so that consumers can fully benefit from greater competition between affiliated and unaffiliated mortgage lenders.

SIFMA's Executive Vice President Kenneth E. Bentsen, Jr. noted in his testimony that the vast majority of future mortgage lending is likely to fall within the guidelines established by the QM definition.  Due to liability, supervisory, reputational, and other concerns, SIFMA does not expect significant origination of non-QM loans. 

Bentsen's testimony focused on two points.  First, SIFMA and its members strongly support the concept that lenders should determine whether borrowers have an ability to repay their loans before they extend credit.  But the ability-to-repay provisions were not intended to outline the parameters of mortgage lending for the most creditworthy borrowers, he said; that is the purpose of a provision of the risk retention statute which exempts Qualified Residential Mortgages (QRMs) from those requirements. 

Second, due to the risk of liability inherent in non-QM lending, the parameters of the definition must provide clear, bright lines at the time of origination, and a safe harbor for compliance. Vague QM standards could lead to secondary market investors imposing their own more objective requirements well within the bounds of QM to assure compliance with the standards. If bright lines are not implemented in the final rule, borrowers will pay more for their loans and have a harder time obtaining them.   

Debra Still, Chairman-Elect of the MBA joined others in saying that the definitions of QM and "ability to repay" should be crafted "such that credit qualification parameters do not become even more conservative than they already are" and so all borrowers enjoy access to safe and affordable mortgage credit.
 
Further, she said, a strong legal safe harbor is essential for a vibrant mortgage market in the future and that 'safe harbor' is misnamed.  'It is neither a pass for lenders, nor does it deprive consumers of an opportunity for court review.  Under a safe harbor a borrower may opt to go to court and seek review of an alleged violation.
 
"The issue is how extensive and expensive the legal proceedings will be.  Uncertain and unbounded legal exposure runs counter to the availability of affordable credit to qualified borrowers.
 
"Without bright-line standards and a legal safe harbor, lenders will have no choice but to alter their business strategies. Some lenders may choose to exit the business, lessening competition.  Others, to mitigate risk, will create even tighter credit guidelines than the QM definition.  And still others will price their loans higher.  Whether it's less competition, tighter credit, or higher costs, all of these outcomes will harm consumers."  
 
CRL Senior Vice President Eric Stein emphasized the importance of defining "Qualified Mortgage" broadly to avoid shutting out creditworthy borrowers from the mortgage market. He recommended that QM include the use of specific "bright-line" standards so that lenders and borrowers are clear on which loans qualify as QMs. He also made the case for allowing borrowers to pursue legal action if an alleged QM loan failed to meet the appropriate standards from the outset.

Speaking for the MHI, Tom Hodges, General Counsel for Clayton Homes said his organization encourages Congress to support the creation of a secondary market that allows for all loans products, including those for manufactured homes, to compete on a level playing field.  Improving the flow of capital to the manufactured housing financing sector will lower lenders' cost of capital and draw more lenders to the market, increasing competition and lowering financing costs. 

MHI recognizes the importance of responsible lending and improving the consumer experience, Hodges said, but has also consistently urged Congress to consider the unique nature of manufactured housing lending and to avoid measures that would inadvertently curtail lenders' ability to make manufactured housing loans.

Alys Cohen, Staff Attorney, National Consumer Law Center presented distinctly different testimony than the other witnesses.  She was critical of tinkering with Dodd-Frank saying that the rules it outlines "are nothing more than a codification of the basic precepts of residential underwriting that have been in place for decades but mortgage lenders ignored these rules," and suggested that further adjustments to the underwriting standards in Dodd-Frank are best done by agencies with substantive expertise, including the Consumer Financial Protection Bureau."

She criticized the inclusion of a safe harbor.  "Creditors should be encouraged to make mortgages that meet the definition of qualified mortgages and those that do not are entitled to a presumption that they meet the ability-to-repay requirement.  "if the ability-to-repay rule provides a safe harbor, some creditors will focus on the letter but not the spirit of the rule," Cohen said.  "It will lead the door open to known types of abusive lending and will predictably encourage the emergence of adjustable rate mortgages timed to reset at the end of six years instead of five."

It would shut the courthouse door to borrowers.  Once there was a determination that a loan met the ability-to-repay standards there would be no redress for the homeowner even if the creditor made the loan with full knowledge that the borrower could not afford it.

Finally, Cohen contended that a safe harbor could interfere with state sovereignty and reduce the rights that consumers currently have under state laws to challenge reckless and bad faith underwriting.

She was also expressed concern about the effects of three laws pending before the subcommittee that would adjust the definition of broker compensation under Dodd-Frank to exempt payments made to employees of the mortgage loan originator; exclude, for the first time since the passage of HOEPA fees paid to the creditor or an affiliate, thus gutting the restrictions on creditor profiteering embedded in HOEPA's point and fees test;   Also excluded are fees for title insurance from the calculation of points and fees "even if the charge is per se unreasonable, wholly retained by the creditor, or an illegal fee."

She pointed to rulemaking from the Federal Reserve regarding originator compensation that parallels Dodd-Frank but does not duplicate its provisions and which CFPB is charged with synchronizing.  'Tinkering further with the Dodd-Frank definition at this point will complicate and delay already difficult rulemaking and could introduce further uncertainty into the mortgage markets. Moreover, while abusive markups were endemic in the brokered-loan market, incentives to make unaffordable loans also were common in loans made directly by lenders."

She called changing the definition of points and fees for the riskiest loans risk unsettling to established precedent.  "It is also bad policy.  Fees from affiliates continue to form a significant part of creditor's profits.  They are totally opaque to consumers."  Moreover, she said, there is extensive evidence that title insurance, in particular, has been a source of price gouging of consumers in recent years.

Complete advance transcripts for all testimony are here.